A building's physical life is estimated at 90 years but its economic life at 55. Which figure drives depreciation analysis, and why?
Correct Answer
B) Economic life — value ends when contribution ends, not the structure
Why this is correct: The governing concept is that depreciation in appraisal is based on loss in value, not just physical wear. Economic life is the period over which an improvement contributes to property value. Value ends when the improvement's contribution ends, which may be long before the structure physically falls apart. Why the other choices are wrong: "The physical life, since the structure itself remains standing that long" is wrong; this confuses physical longevity with value contribution. "The average of the two estimates" is wrong; there is no standard method to average them. "Neither; only actual age matters" is wrong; effective age and economic life are used to estimate depreciation. Exam tip: For depreciation calculations, always use economic life, not physical life.
Why This Is the Correct Answer
Why this is correct: The governing concept is that depreciation in appraisal is based on loss in value, not just physical wear. Economic life is the period over which an improvement contributes to property value. Value ends when the improvement's contribution ends, which may be long before the structure physically falls apart. Why the other choices are wrong: "The physical life, since the structure itself remains standing that long" is wrong; this confuses physical longevity with value contribution. "The average of the two estimates" is wrong; there is no standard method to average them. "Neither; only actual age matters" is wrong; effective age and economic life are used to estimate depreciation. Exam tip: For depreciation calculations, always use economic life, not physical life.
More cost-approach Questions
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An appraiser is estimating accrued depreciation for a commercial office building using the age-life method. The building was constructed in 1992 and has a total economic life of 60 years. As of the appraisal date in 2024, the appraiser determines the property’s effective age is 36 years due to consistent maintenance, modernized systems, and favorable market perception. What is the percent of accrued depreciation indicated by the age-life method?
Which event would RAISE a building's effective age relative to last year's estimate?
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Which statement is MOST consistent with USPAP Standards Rule 6 regarding the identification and treatment of external obsolescence in the cost approach?
A 40-year-old industrial warehouse has undergone no major renovations and suffers from outdated electrical systems, inefficient insulation, and obsolescent loading dock design. Market evidence indicates similar properties typically exhibit functional obsolescence reducing utility by 15% and external obsolescence reducing value by 10%. If the appraiser uses the age-life method with a total economic life of 50 years, how should effective age be adjusted to reflect these conditions?
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The age-life method expresses depreciation as:
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